The desk sees potential upside risks for the US dollar, driven primarily by the recent Federal Reserve rate hike and changes in monetary policy by Japan's Bank of Japan (BoJ) and the UK's Bank of England (BoE). As per the full note from MUFG EMEA, they suggest that the US dollar's strength might persist amid these central bank actions, which could pressure the USD/JPY pair following the BoJ's tightening measures. Current market consensus for JPY suggests a median target of 152.0 by December 2026, reflecting varied expectations from different firms, with prominent forecasts ranging widely from 140.0 to 165.5, indicating uncertainty in future exchange rate movements.
What the desk is arguing
The desk frames this as a time of increased volatility for the US dollar, with the FOMC's recent rate hike likely to support its value against both the JPY and GBP. Derek Halpenny from MUFG notes that market participants should closely monitor how these policy shifts impact USD/JPY movements, particularly following the BoJ's recent policy adjustments.
Indeed, as highlighted by the commentary, immediate reactions to the BoJ's rate hike sent USD/JPY lower late in the week, eliciting questions about the sustainability of this trend. As market participants grapple with these new dynamics, the potential for further USD appreciation can't be ignored, especially with solid indications from the Fed of a hawkish stance.
Where it sits in our coverage
Currently, our consensus target for USD/JPY is at 152.0, with range estimates spanning from 140.0 to 165.5 by December 2026. Specific firm forecasts include: - Goldman: Dec26 target of 165.0 - Nomura: Dec26 target of 165.5 - MorganStanley: Dec26 target of 140.0
This view aligns with a broader market perspective that anticipates a weaker JPY against a strengthening USD, noted in the consensus targets and indicating potential downside risks for the currency pair as current estimates for other currencies highlight similar sentiments.
How other firms see it
Firms like Goldman and Nomura are aligned in their outlook for USD/JPY, projecting higher targets which support the desk's view on potential USD strength amid ongoing central bank shifts. Conversely, firms such as MorganStanley and Commerzbank provide more cautious estimates, signaling possible concerns regarding the sustainability of USD strength given JPY's historical resilience.
Additionally, movements in EUR/JPY may also reflect these dynamics, especially as the broader trends in both the BoE and the Fed create ripples across this cross-currency pair.
01Upside risks for the US dollar amid Fed, BoJ, and BoE shifts
02USD/JPY targets vary significantly across firms
03Recent rate hikes could pressure USD/JPY and EUR/JPY movements
04Market consensus suggests a bearish outlook for JPY in broader terms
Market implications
Watch for USD/JPY to react to upcoming economic data releases and guidance from the Fed, particularly around interest rate discussions. A break below recent support levels could amplify bearish sentiment around JPY, while any surprises from central bank communications could strengthen the dollar even more.
Risks to this view
A reversal in this bullish dollar stance could occur if geopolitical tensions escalate or if economic data from the US points to weakness, compelling the Fed to reconsider its rate outlook. Additionally, softened inflationary pressures or a dovish shift by the BoJ could stabilize the JPY against the dollar.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halperny, Head of Research Global Markets EMEA and International Securities. It's Friday 18th September 2026 and joining Derek to pose some questions on the financial market themes for the week ahead is Nico Jan Thiensen in FX Sales in Dusseldorf. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.
It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hey, good afternoon Derek, great to have you on our podcast, welcome as well to our listeners.
Thank you, Nico. How are you? All good?
I'm very good. I'm very good. And you?
Good, good, good. Thank you. Thank you.
So we had a very busy week on the market specifically looking at the central bank decisions we had and the impact thereof. Why don't we start off with the Fed? So FOMC did a hike, which was expected.
What are the implications for the dollars? What do you take away from the meeting this week? Yeah, like I think as you said, it was expected.
The interpretation from the press conference and the other communications was certainly that there is more to do. Kevin Warsh referred to the removal of a dose of accommodation, suggesting there's still more accommodation. And then, of course, the Dots profile showed one further hike this year and no change in rates next year and then a cut in 2028 and 2029.
So I think all in, the market's reacted to the fact that there's more to do and it's definitely not a kind of one and done type scenario. But, you know, if you look at yield moves in the US, the bulk of the move came ahead of the FOMC, the data prior, particularly the CPI data. The markets were well positioned and a lot of the move had taken place prior to the actual meeting.
I think going forward, ultimately, while the Dots profile shows another hike and then no change in 2027, we're still well below the current market pricing. So the OAS market has basically rates moving higher to 463 in the middle of next year. So another three hikes.
So in that sense, I think the Dots profile should act as a way of containing the rates reaction going forward from here. But obviously, you have to accept that over the short term, in terms of positioning, in terms of momentum, there's definitely a risk that we get a, what I would class anyway, a further overshoot of US rates in response to this and therefore the risks for the US dollar, certainly over the short term, is that we get an extension of the strength that we're seeing at the moment. I think beyond just the relative macro and rates in the US, there's other factors that I think could help the dollar over the short term.
Energy prices now obviously settling above $100 a barrel on Brent. French political risks have been building the OET boom spread above 100 basis points for the first time since 2012. And then just general risk conditions.
If rates stay up at these levels, there's certainly a bigger risk that you could get some increased volatility and risk assets. So all of that combined, along with the risk of a rates overshoot, you have to conclude that, yeah, for the short term, certainly weeks, maybe even months, that there's definitely risks that the dollar could extend further beyond. But again, I go back to my point earlier that the DOTS profile is showing one more hike.
There's three priced into the market. So I do think we're overdone. We're not going to get three hikes delivered.
And in that context, even if there is an overshoot over the short term, it should then retrace and the general move should be contained over the medium term. And I mean, if I remember from our last conversation and from your longer term forecast earlier in the year, you had drivers for the dollar to weaken off relative to the euro, et cetera, be it the labor market, which you thought wasn't that as hot as the market price. Inflation risks had peaked.
All the pricing from tariffs, et cetera, that had been over the top, et cetera. So of those longer term drivers that made you think of a euro dollar higher in the longer term, are they still there? Has anything changed there from a longer term point of view?
Yeah, we still have those forecasts generally. You may shift the levels to show a slightly stronger dollar than what we were expecting. So just to remind listeners, by the middle of next year, we had kind of 120-ish for euro on a DXY basis that would translate into about a 4% drop.
Now, as I mentioned earlier, the risks over the short term is that we got an extension of the dollar strength. Obviously, it would depend on the extent of that move of the short term. But still, we would expect those kind of levels by the middle of next year.
I think it's important to make reference here to while the Fed now is going to hike twice, which is two more times than we were expecting originally, we have also raised our forecasts for the ECB, the Bank of England, the RBA. We're considering the Bank of Canada. So across G10, we're raising a lot of our monetary policy forecasts as well.
We now have the ECB moving two more times to a peak policy rate of 3%. So from a G10 FX perspective, that's probably the most important other central bank to look at. And in that context, beyond the short term risks that I spoke about a moment ago, I still think if the ECB delivers as we expect, then I think the grounds are still very much there for expecting the euro then to move higher and reach those levels by the middle of next year.
Yeah. I mean, obviously, good point. FX rates are relative prices, so euro against dollar.
The other one standing out this week, obviously, is the Bank of Japan and yeah, we had the hike, dollar yen moved. Was that a surprise? Is that what was the market expecting?
Yeah. Like I think the BOJ had a very difficult task today to basically match the hawkishness that ultimately come into the market in terms of expectations about BOJ policy going forward. And really, I think what's happened today, it's not hugely surprising because I think as I said, it was going to be difficult for the BOJ to match that.
And really, let's not forget that at the beginning of September, basically in the first five trading days of September, dollar yen dropped by 4% from 160 to 154, a little bit below 154, so nearly 4%. And a lot of that was around speeches delivered on the 2nd of September by Hajime Takata, the most hawkish policy board member, and a speech by Governor Ueda. But it was Takata's speech where he mentioned the prospect of a potentially larger than 25 basis point move, or even back to back hikes.
That really got the markets going and we saw a big move to the downside for dollar yen. And dollar yen moved a lot more than the broader dollar market. And now basically, I think the markets have come back to its senses to a degree.
I don't think Governor Ueda was dovish today. I think he gave a very sensible message, a very clear message in terms of we still have more to do. But he didn't back up the ideas that were thrown out by Takata that had essentially got into the market pricing to a degree.
And hence, the dollar yen move over those early days of September is now retracing. We're still only just above halfway retraced from the drop from the 1st of September. So there is certainly potential over the short term for dollar yen to continue moving higher, especially if the broader dollar continues to strengthen.
But it really is that kind of short term dynamic that reflects the move in dollar yen today. As I said, the messaging in general was, I think, pretty clear and certainly consistent with our view that we get another hike, possibly in December and then another one in Q2 next year to take us to 1.75%. We did have two dissents, Toichiro Asada and Ayano Sato.
Both of those members are the newest members to the board that have been brought in by Prime Minister Takahashi, reflationists and therefore known doves. And in that sense, it's no surprise that they dissented today. So I certainly wouldn't point to that as being, you know, the main reason for the move in dollar yen today.
I think it's the broader context that I've mentioned. OK. Let's move then on to, this was dollar yen.
Many of our European corporates, for them, euro-yen is the main variable that they're looking at in the yen space. Many have been waiting for lower levels to buy the euro for months, for quarters, for years. We've come down from, what was it, 187, 188 down to, you know, below 180 a few days ago.
The hope that we see, let's say 160, et cetera, where would you, how would you see that in the current environment? You've got two more hikes, you said, for the ECB to hike. We expect more from the Bank of Japan to hike.
So interest rate-wise, euro against yen, how does that look? Sorry, you mentioned 160, I mean, hoping for 160. Exactly.
Hoping for 160. I mean, you know, on the calls that, you know, we're having with clients, euro-yen is one of the variables that, you know, doesn't seem to come down in any significant way. And that has been the case for quarters and for years almost, right?
So what can we expect? How far, where would you say, okay, euro-yen, this is a 175, 170, how far do you see this moving? Again, all of the downside.
To the downside over the short term, I'd, like, obviously there are some areas. Like when I spoke a moment ago, I spoke about the potential for a risk-off move and definitely if rates stay up here, certainly if global rates move higher or rates across the major developed economies, there's definitely increasing risks that you do get a bigger blowout in equities at some stage. And clearly an equity drawdown globally would push euro-yen lower.
Whether, to what extent, obviously it would depend on the scale of the move, but that's an obvious risk that would help to take euro-yen lower. Beyond that, though, over the short term, I think, you know, there's definitely potential, there's more potential for maybe dollar-yen getting back up to the 160 level than there is, I think, euro-dollar moving notably lower. So therefore, again, that kind of diminishes the near-term prospects of euro-yen moving further lower from here.
So this rebound that we're getting right now, you know, that could have legs over the short term. Those who read our FX Weekly, we've been running a trade view short euro-yen that worked quite well, obviously, as you mentioned, going below the 180 level, down to around 177, I think. That looks like it's run its course, so we've closed out that position.
So again, in answering your question, the opportunity to buy euro-yen at those levels, I don't think we're going to get that opportunity again over the short term. But if you go further out, we do have dollar-yen coming down more notably, and again, in that context, we would certainly expect lower euro-yen in 2027. Let's then maybe move to the next central bank this week, Bank of England.
What, I mean, euro-sterling is another key variable that, you know, corporate clients in Europe are looking at. Yeah, no, interesting, interesting developments there. The euro-sterling bounced yesterday on the back of the announcement.
No surprises in terms of the unchanged policy rate. Again, no surprises on the voting, 6-3, same as the last meeting. Of the six who voted to keep rates on hold, Governor Bailey, Claire Lombardelli, Sarah Breeden and Dave Ramsden all indicated in their individual explanations that the case for a rate hike could be building based on energy price risks.
So I think we're being set up for a move in November, that's our view, and we expect a hike unless there's a dramatic drop in energy prices between now and the 5th of November when the MPC next meets. The bigger development, of course, was the announcements in relation to Q2, and this definitely must reflect the increased concerns about the outright sales from the Bank of England and the impact that it was having at the long end of the gilt curve. So they basically paused all gilt sales until at least April next year while they discussed the intricacies of the plan that was announced. £120 billion worth of gilts maturing beyond 2049 will be kept on the balance sheet until maturity, so that knocks out that supply.
And then another £146 billion of gilts maturing between 2035 and 2049 will be sold £20 billion per year, but directly to the government via the DMO, so not to the market like has been taking place up until now. So basically, we're knocking out a level of supply that was going into the market and the 30-year yield dropped yesterday by 12 basis points. So in a way, it's not exactly the same, but it's similar to what Scott Besant did in terms of it has the same implications in terms of reducing supply going to the market.
This is a little bit different, it's obviously the central bank, it's a QT programme, they have the right to alter that programme, but it's clearly an acknowledgement of the impact that Bank of England gilt sales have been having on long-term rates. And the pound, I think, weakened in part on the back of that. But of course, if this helps gilt sentiment, you would argue that that's not necessarily sterling negative.
So I don't think it's a game-changer in terms of sterling, the FX view, and of course, we still have passive QT taking place, we still have rate hikes coming, and in that context, I don't think it has too much implications in terms of the level of the pound on our forecast. Okay, great. Thanks a lot for the discussion, and yeah, have a good weekend, everybody.
Yeah, thanks, Nico. Cheers. Thank you.
Thanks, Derek. Bye-bye. Thanks.
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